Dell (NYSE: DELL) is known for its terrific customer service and catchy ads but the New York State Supreme Court has found that some of those ads were fraudulent and misleading.
Judge Joseph Teresi wrote that the company "engaged in repeated misleading, deceptive and unlawful business conduct, including false and deceptive advertising of financing promotions and the terms of warranties, fraudulent, misleading and deceptive practices in credit financing and failure to provide warranty service and rebates."
Dell will be prohibited from engaging in such conduct in the future and may also have to pay an as yet undetermined amount of restitution to consumers.
The Independent reports that Citigroup's (NYSE: C) Smith Barney took the $100,000 entrusted to it by a 76-year old mother and put it in now-illiquid Auction Rate Securities (ARS) -- bonds whose interest rates are supposed to reset in weekly auctions -- without her understanding. After she died earlier this year, her son discovered that what she had told him was "in an easy-to-sell money market fund" was in fact frozen in ARSs.
Since February, when I first posted on the $330 billion ARS market, a forum has gathered with 3,924 comments from people who have much of their savings frozen. This widow, like many of the people who comment there, had their money moved into ARSs without their knowledge or with the assurance that the money would be safe and would offer a higher than average return. One key question: Did ARS purchasers receive prospectuses or know of their risks?
But last year, an accounting rule change caused demand for ARSs to evaporate since companies could no longer account for them on their balance sheets as "cash equivalents." So the banks started to bid on the auctions themselves to keep the market going. But thanks to the credit crunch, banks no longer had sufficient capital to prop up the market. So the auctions failed and thousands of people, like this widow, have found that they can't get their money.
Auction-rate securities, which traded regularly since 1985 and were sold to many investors as "cash equivalents", hit a pocket which no one expected. The banks which ran the auctions shut them down because they did not want any of the underlying securities on their balance sheets. Now companies and individuals who bought the paper cannot readily get their money back.
Ultra-aggressive NY State Attorney General Andrew Cuomo, clearly hoping to become the state's governor one day, has launched a huge probe into why the banks killed the market. According toThe Wall Street Journal, "Mr. Cuomo's office sent subpoenas to 18 institutions on Monday and Tuesday seeking information on their auction-rate-securities." Firms including Merrill Lynch (NYSE:MER) and Citigroup (NYSE:C) have been asked for documents.
Two legal issues face big banks and brokerages involved in the auction-rate market. The first is whether they had an obligation to keep a market open which had operated successfully for over two decades. They fundamentally left their clients holding the bag.
The second potential charge is much more significant. Did brokerage houses represent to clients that the paper was virtually the same as cash, redeemable at any time? If so, buyers of the securities may make a series of claims involving fraud. Several suits have already been filed.
In a market which was over $300 billion dollars, the potential liabilities are substantial. It is just the kind of case than can get a guy elected to higher office.
Douglas A. McIntyre is an editor at 247wallst.com.
The Wall Street Journal reported that New York state's attorney general, Andrew Cuomo, has launched an investigation into auction-rate securities and is seeking information from some of Wall Street's biggest institutions including UBS AG (NYSE: UBS), Citigroup Incorporated (NYSE: C) and Merrill Lynch & Co Inc (NYSE: MER), a person familiar with the matter said.
According to the Financial Times, Deutsche Bank AG (NYSE: DB) and other investment banks are working on plans to develop a clearing house for the credit derivatives markets. In an attempt to reduce counterparty risk, the banks are trying to develop a system that would only allow institutions with strong capital bases and credible trading histories to clear trades in the credit default swap markets with a central counterparty.
OTHER PAPERS:
The news that The Royal Bank of Scotland Group Plc (NYSE: RBS) is planning a rights issue of between GBP5B and GBP12B received mixed reviews from British analysts and investors, the Telegraph reported. The analysts expect the bank to cut its dividend.
Freddie Mac and Fannie Mae will no longer buy mortgages from lenders that use in-house appraisers. Many observers believe that the use of independent appraisers -- who don't work for a company that has the goal of making loans --would have resulted in fewer of the ebulliently optimistic appraisals that contributed to a run-up in home prices that was destined to come crashing down.
The move will force lenders like Countrywide Financial (NYSE: CFC) to sell their appraisal operations. The New York Timesreported that "As defaults and foreclosures have surged in the last year, regulators and industry analysts have raised pointed questions about the independence of appraisers. Because they rely on banks and brokers to give them additional business, appraisers often feel pressured to value a home at prices that match or exceed loan amounts."
Standard & Poors, a division of McGraw-Hill (NYSE: MHP), has joined Moody's (NYSE: MCO) and Fitch in announcing reforms in the wake of the criticism for their role in the subprime fiasco.
S&P says it will hire an ombudsman to investigate conflicts of interest and bring in an outside firm to look at compliance and ethics-related issues. Lead analysts will be rotated from time to time and the company will consider a slew of new factors: liquidity, volatility, correlation and recovery, and "worst-case scenarios."
But New York Attorney General Andrew Cuomo isn't buying it: "The supposed reforms announced today by Standard & Poor's and by Moody's on Tuesday are too little, too late. Both S.&P. and Moody's are attempting to make piecemeal change that seem more like public relations window-dressing than systemic reform."
From an investor's standpoint, I'm inclined to agree with Mr. Cuomo. Moody's carries a market cap of nearly $10 billion, but its entire business depends on the willingness of investors to take its ratings and analysis seriously.
But over the past year or so, the "work" of the ratings agencies has been exposed as pretty much a joke. It will take a lot more than this to recover the company's reputation.
Merrill Lynch & Co. (NYSE: MER), Deutsche Bank AG (NYSE: DB), and Bear Stearns Cos. (NYSE: BSC) have been subpoenaed by New York Attorney General Andrew Cuomo as part of an investigation of "related to the packaging and selling of debt tied to high-risk mortgages," according to the Wall Street Journal (subscription required).
Among the information Cuomo is seeking is about the super cozy relationship between the banks and the credit-rating agencies, the paper said.
This is big.
Cuomo, the son of former Gov, Mario Cuomo, is a politically ambitious guy. His predecessor Eliot Spitzer made his mark exposing the sleazy practices of Wall Street analysts and brought down former New York Stock Exchange honcho Richard Grasso.
Sure this is a fishing expedition, but Cuomo is a captain of a mighty big ship. The banks better strike a deal with him fast or else they are going be in for a tough slog.
New York Attorney General Andrew Cuomo's quest for the Governor's seat is exposing a deep flaw in the relationship between student loan companies and universities.
According to the New York Times [registration required], Cuomo's investigations led to the dismissal of Columbia University's financial aid director yesterday after the release of documents showing he promoted a student loan company -- Student Loan Xpress -- in which he had a stake, sending letters to parents and alumni on three occasions praising the lender.
Columbia joins other schools including Johns Hopkins and the University of Texas, Austin that have been caught up so far in this scandal. The fundamental problem is that schools don't pay much money to their employees even as they keep raising tuition. As with the rest of the U.S. economy, the gap is covered by debt -- in this case student loans.
One of these days, I would like to see a New York Attorney General go to trial with a prominent case of white-collar crime. In the wake of the internet stock crash and uncovering of unscrupulous analysts, then New York Attorney General Elliot Spitzer was able to put together a strong case against Henry Blodget -- and then he promptly settled the case for a fine that was far less than the amount Blodget earned and, worst of all, Blodget didn't even have to admit guilt.
Dell (NYSE: DELL) is known for its terrific customer service and catchy ads but the New York State Supreme Court has found that some of those ads were fraudulent and misleading.
Auction-rate securities, which traded regularly since 1985 and were sold to many investors as "cash equivalents", hit a pocket which no one expected. The banks which ran the auctions shut them down because they did not want any of the underlying securities on their balance sheets. Now companies and individuals who bought the paper cannot readily get their money back..gif){kind=logo}
New York Attorney General Andrew Cuomo has reached an agreement with 
Standard & Poors, a division of 
Merrill Lynch & Co.
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